Money and Power

by William D. Cohan

  This time, Paulson flew to New York. “I knew something was up,” he said. “It was right after Labor Day.” For Bob Hurst, who is Jewish, attending the special Wednesday meeting meant not observing the second day of Rosh Hashanah as he usually did. But Bob Katz insisted he be there. When Hurst asked Katz what the meeting was about, he told him, “I can’t tell you.” When everyone on the Management Committee had assembled, Friedman told his most senior partners that within the next week, he planned to retire and to name his successor, or successors. “It was an enormous shock,” Hurst said. Another partner told Friedman to stop joking around. “I’m not kidding,” Friedman said. Paulson, for one, could not believe what he was hearing. Had Friedman lost his mind? Right afterward, he went to see Friedman, alone. “You can’t leave right in the middle of all this,” Paulson said he told him. “You’ve got to stay for a transition.” Without going into too much detail, that’s when Friedman told Paulson about his heart ailment. Paulson was shocked but didn’t say much. “Steve looked younger than I did,” recalled one Management Committee member when Friedman later told him, too, about his health issues. “He was vigorous. I had no idea until he told me about the problem. And so it just came as a shock.… The pressure was immense. I think people that criticize him and come down hard on him for it—John Weinberg and others did—never knew what he was going through, never walked in his shoes.” Barbara Friedman was especially concerned that he had informed his partners that his decision was definitive and final. He assured her that he had been crystal clear.

  Suddenly, despite the best efforts of Friedman and Katz to plan out the succession, the power vacuum at the top of Goldman Sachs was palpable for the first time. Other leadership changes at the firm may have been equally sudden—for instance, after Levy’s death or Catchings’s decapitation—but the successors had been carefully groomed or were obvious. Not in 1994. An immediate power struggle ensued, unlike any other in the firm’s long history. What made the dynamic even more intense was Friedman’s directive to the group that he intended to announce the new leadership team at the regularly scheduled monthly partners’ meeting the following Monday, five days later. The decision had to be made by Sunday night. “There were guys who had the bit in their mouth and really wanted to run Goldman,” said a member of the Management Committee.

  Although there were twelve members of the Management Committee at that time, there were only a handful of likely contenders to lead the firm. Paulson had emerged as a favorite of Friedman’s and a proven rainmaker, but his support was limited to the investment bankers. Paulson’s co-heads of investment banking—Hurst and Overlock—were possible, too, but considered more long shots. (Hurst especially became a long shot after he inadvertently confessed to Friedman in Wyoming that he didn’t want the job.) There was also Roy Zuckerberg, the oldest member of the Management Committee, but although he wanted the job, few saw him as anything more than a self-promoter and an interim solution at best. Corzine and Winkelman, the two co-heads of fixed-income, were both serious contenders for the top job, despite presiding over the huge losses the firm was—still—experiencing in 1994. Winkelman, known by some at the firm as the “Grim Reaper” for personnel cuts he had made at J. Aron, was very highly regarded not only for the turnaround he had engineered at J. Aron but also for the success the firm had in fixed-income in 1992 and 1993. He had been appointed co-head of fixed-income, in part, to tame some of Corzine’s more reckless trading instincts. “Mark had turned out to be enormously talented,” Rubin recalled, “and, although I was responsible for [J. Aron], Mark was the one who really went around and figured out how to reposition the company, so it became an immensely profitable activity.”

  Not surprisingly, the combination of Friedman’s announcement and his stated goal of having a new leader, or leaders, anointed quickly set off a fierce round of jockeying for power. Immediate comparisons were made between Goldman’s Management Committee and the Vatican. People were looking for puffs of smoke everywhere. Friedman, then fifty-six years old, admitted as much. “Our management committee is like a college of cardinals,” he said. “They’re very talented people, and in the college of cardinals, a substantial number of them have a reasonable, legitimate belief that they should be elevated. I’d be wary of a firm that didn’t have a large number of people with the self-confidence to think of themselves as capable of taking the top job. I think that’s an absolute sign of strength.”

  Paulson was Friedman’s preferred choice to lead the firm in the wake of his abdication. “You’ve got to recognize I was in Chicago,” Paulson said; “people didn’t know me very well. I didn’t look like an investment banker, didn’t dress like an investment banker, didn’t talk like an investment banker, was rough around the edges and had a lot I had to learn. I questioned, frankly, that maybe I wasn’t ready, but I was sure a lot readier to run the firm after being in New York and in the trenches there for a few years than I was stepping right in from Chicago.” To a number of the Goldman intelligentsia, the choice of Paulson seemed implausible at best. He was a relatively unknown coverage banker from Chicago with a certain bull-in-the-china-shop demeanor and had very little understanding or knowledge of the trading side of the business. But he was a major producer of business. “Hank had the nerves of a bandit,” Rob Kaplan, a former senior investment banker at the firm, remembered from the days when they worked together on Inland Steel and Outboard Marine.

  Paulson had always cultivated Friedman. The two men were friends, having found common ground as athletes. Indeed, at an offsite in Westchester County a few years after Paulson had joined Goldman, Friedman, the national wrestling champion at Cornell, challenged Paulson, a former All-American lineman at Dartmouth, to a wrestling match. Paulson had done some intramural wrestling at Dartmouth but hadn’t wrestled since he was eighteen. Still, he took one look at Friedman, who was smaller and lighter, and felt a bit sorry for him. Friedman, meanwhile, had kept fit working out with the Cornell wrestling team at the Downtown Athletic Club. “So I took him down, very quickly, with the fireman’s carry,” Paulson said. “The next thing I knew I was on my back. I’d never been pinned before. So I got angry. I thought, ‘This little guy, I don’t care if he is my boss, I’m going to pick him up and I’m going to hurt him.’ I went back at him about five or six times. And I got pinned five or six times. The next morning when I was trying to get out of bed, it took all my pride and everything else to pretend like nothing had happened and to get out of bed and get dressed and get out there.” Fortunately, his suit covered up his myriad of bruises and scrapes from the matches. (Friedman also used to challenge Jide Zeitlin, another partner, who was a wrestler at Amherst, to impromptu wrestling matches.)

  To check himself about Paulson, Friedman flew down to Washington and met Rubin at the White House—Rubin had not yet ascended to treasury secretary—to discuss the leadership matter with him. Rubin agreed that Paulson was the right person to lead the firm. After that meeting, Friedman approached Paulson. “He immediately made the pitch to me in the first meeting,” Paulson recalled. “He hoped that I’d be one of the people that came and ran the firm.” But he could hardly respond. “I was so taken aback and shocked by the whole thing that I just couldn’t get my mind around it,” he said. “I said good-bye to him and literally left. Didn’t talk to anybody else. I got in a plane and flew back to Chicago.” He called Wendy from the car and told her what had happened. “In the worst way she didn’t want me to do it,” he said. “I told her I thought it was very unlikely that I would. And that I thought there would be other people chosen.” But, false modesty aside, Paulson did want the job as much as anyone else.

  Friedman told the Management Committee he wanted to hear everyone’s views about who the next leaders of the firm should be. He told them he wanted to meet, alone, with each member of the committee and go through the usual “crossruffing” of having them share with him what the best leadership structure should be along with whom they wanted to lead the firm. He asked them t
o write down their thoughts as well and encouraged them to meet together. They were stunned, and angry. “It took a number of the Management Committee partners by complete surprise,” one senior Goldman executive explained. “I know that they were very angry. They expressed that anger to me. I was sort of surprised how angry they were. They felt that 1994 was not a great year for the firm and they felt that the firm was in real trouble. They needed stable leadership through the crisis, and they weren’t getting it from him. They felt that he had left at the most inopportune moment.”

  Over the next two days, Friedman met with all but two members of the Management Committee in person; those two he spoke with by phone. He opted for this tight time frame as a way to avoid leaks—he figured the matter could be kept a secret for a week, at best—and to minimize the politicking. “I wanted to see as pure a decision as we could make it,” he said. At one point, someone overheard David Silfen, a member of the Management Committee, say to Hurst, “I knew this was gonna be a bad year, Bob, but honestly, I had no idea how bad it would get.”

  While there is little question that, at the time, nearly every person on the Management Committee fantasized about running Goldman Sachs—including Hurst—Hurst could see relatively quickly which way the tea leaves were trending. “Corzine was a given,” he said. “There was no issue, I don’t think, about Corzine. Corzine had wanted it. He was very aggressive about wanting it. He was our chief financial officer and he was co-head of the biggest division”—some at Goldman saw this dual role that Corzine had played as a major negative. “Fixed-income had to be represented in the equation. Jon was very personable and he was a man of the people.… Then the question was, what’s the permutation? Is it co-heads? Is it one and two?”

  What emerged was a surprising consensus that some combination of Corzine and Paulson should lead the firm. Indeed, a preponderance of the committee thought Corzine could lead the firm alone, although that view was tempered—insistently by the investment bankers—by the feeling that Corzine needed Paulson as a decisive number two. “There was no one or virtually no one other than Corzine or Paulson who would have had any votes for the job from someone other than themselves or from someone other than their best crony,” Friedman said. “What you could safely say is, there would have been no broad support for anyone other than those two, and Corzine was accepted by most people as a part of the solution. Remarkably though, even by people who felt that way, it was, ‘But you have to have someone strong paired with him.’ I recollect no one other than Corzine being comfortable with Corzine alone. And most people thought Hank was the strongest one to be partnered with him.”

  By the weekend, when Paulson returned to New York, it was clear that some combination of Corzine and Paulson would be leading Goldman Sachs. The only open question was whether the two men could figure out an acceptable arrangement between themselves. Before Paulson left on Wednesday, in shock, for Chicago, sensing in what direction the decision would go, Friedman had urged Paulson to call Corzine and talk about working together. Paulson placed the call, but Corzine didn’t return it. When they spoke a day or so later, Paulson recalled, “It was pretty clear to me that he wanted to do it by himself.” This didn’t feel right to Paulson. “I was really quite unsettled by the whole thing,” he recalled. “Steve leaving so suddenly and the need to select new leaders in a week affected me.” Before he flew back to New York, he told his wife, “I don’t think you need to worry. I’m not sure I want to do this. I believe others will be chosen.” He felt sure things wouldn’t work out for him.

  On Saturday, Friedman met with Corzine and Katz at his large Beekman Place apartment overlooking the East River. That was where Corzine announced definitively that he wanted to run the firm as CEO—even though the title made no sense in a partnership—and would accept Paulson as his chief operating officer. “They nurtured me all along,” Corzine said. “They put me in the CFO’s position. They took me out of the trading room and had me talking to banks and other stakeholders. I began to recognize that they were thinking of me in bigger terms. It’s a little bit like running for political office. You think, ‘Maybe I have a chance to win the primary, maybe I have a chance to win the election.’ But nothing in life is certain.”

  At Friedman’s urging, Paulson had breakfast with Corzine. Paulson was staying at the Pierre, on Fifth Avenue, and they had breakfast there together on Sunday morning. “When you spend time with Jon you’ll see he’s a very charming guy, incredibly charming,” one Goldman partner said. “But he’s very indirect.” At the breakfast, Corzine told Paulson, “I’ll be the best partner you ever worked with.” He also told Paulson he wanted to be the CEO and he wanted Paulson to be the COO. “I remember being willing—not because I was so eager to run the firm—but because that was what I’d always seen,” Paulson said. “There had always been co-heads. We’d had John and John and Steve and Bob. We didn’t have CEOs and COOs. There was no CEO. We were a partnership. The senior partners were our bosses but everyone on the Management Committee had a vote, so no one could really dictate.”

  After breakfast at the Pierre, the two Goldman partners headed to Central Park, where they continued their discussion while walking around. “After their walk Paulson was not quite sure what Corzine was saying” about how their power-sharing agreement would work. Paulson remembered. “He kept saying to me, ‘You’re not going to believe what a good partner I am or how well we will work together.’ I remember thinking to myself, ‘I’m not sure this is going to work. Am I going to do well at it? Am I going to like it? Are we going to work well together? And I certainly don’t want to be a senior partner that quits. So I want this to work.’ ” From Central Park, they took a cab to Beekman Place. Paulson got out and went to speak with Friedman. Corzine went off with Bob Katz, his close ally.

  When Paulson got up to apartment, Friedman asked him if he and Corzine had had a conversation. Paulson said they had spoken. “Well, he told you he wants to be senior partner and have you be COO?” Friedman asked.

  “Well, he didn’t say it quite that way,” Paulson told Friedman. “I wasn’t quite sure what he was saying.”

  “Well, that’s what it is,” Friedman told him. “And I think you should do this.” Friedman later commented, “We came to believe their chemistry would be very good, and we had a good sense of optimism about it. They wanted to work together.”

  That afternoon, the Management Committee reconvened at the U.N. Plaza–Park Hyatt Hotel. Friedman officially nominated the two men, who then spoke briefly to their partners and answered questions. While the committee discussed the nominations, Paulson and Corzine left the room and went to watch the men’s U.S. Open tennis final on television. Soon enough, the committee unanimously approved the new management team, with Corzine as CEO and Paulson as COO. After a quick champagne toast, the Management Committee turned its attention to the biannual process by which new partners would be named. Friedman called Whitehead and told him the news and then, that night, went to Scarsdale and had dinner with John Weinberg, the firm’s senior chairman, and told him about his decision. “I really thank you for your sensitivity,” Friedman said Weinberg told him, “and I understand and I appreciate this—your coming—and I understand.” But Weinberg was not the least bit pleased that his careful succession plan had come totally unwound.

  A number of Paulson’s banking partners—for instance, Bob Hurst, Mike Overlock, and Gene Fife—on the Management Committee questioned his decision to be Corzine’s deputy. They thought Paulson should have insisted on being a co-senior partner with Corzine in order to ensure that the firm’s investment-banking partners felt sufficiently empowered. They thought Paulson should use the leverage they felt he had. “I remember afterwards members of the Management Committee saying to me, ‘You shouldn’t accept this position,’ ” Paulson said. But he told his colleagues, “Well, I feel comfortable with this to the extent I can feel comfortable. I feel uncomfortable with the arrangement generally. But this is either going to work betwe
en Jon and me or it’s not going to work. And if it’s not going to work, it’s not going to make any difference if we’re co-heads or whether we’ve got this other arrangement.”

  Paulson admitted that his argument to his fellow banking partners at the time was most likely a justification for not getting the support he needed from the Management Committee to become the co–senior partner. “On the other hand, you just need to realize how fast this whole thing came upon me,” he said. “And what a huge thing it was. To move to New York, to be doing this job, to be tied as a co-head to someone I did not know.” Corzine was likable enough and friendly—a politician even then—but the two men could not have been more different. Paulson remained hesitant. “I was not of the view that ‘I am ready to run this firm, that I’m capable of running all aspects of it, I want to run it all, and, by God, I’m determined and I’m going to fight to do it,’ ” he said. “That was not my mind-set.”

  The next afternoon, on Monday, Friedman, Paulson, and Corzine told the 150 partners worldwide about the management change. One New York–based banking partner was in San Francisco that day and remembered being dumbfounded by the announcement. “I was listening to the call,” he said, “and Steve Friedman gets on the phone. He goes, ‘I’m not feeling well, and I’m gonna retire.’ I’m thinking, ‘Well, what the fuck?’ We thought the firm was going under.… First of all, who were the senior partners of the firm? John Weinberg, Bob Rubin, Steve Friedman, Jon Corzine, Hank Paulson. Five CEOs in ten years. I mean, I can’t even name a company, let alone a decent one, that’s had five CEOs in ten years. In 1994, literally, people thought the firm was going bankrupt.”